Fisheries Committee on June 11th, 2009

[Paul Seipp]

I'll take a shot at that.

Certainly, looking back, during 2008 and late 2007 there were a number of stakeholder sessions held throughout the Atlantic Canadian provinces. Bank of Montreal did have representation at those meetings.

[Raynald Blais, Bloc, Gaspésie—Îles-de-la-Madeleine, QC]

I assume that eventually, the fishing licence will end up having a value associated with the quota, that is associated with the species. In the end, was the objective to quantify the value of the licence?

[Craig Thompson]

The objective of the most recent meeting was to discuss access to financing for the industry. As a result of the discussions that were held at that meeting, one of the issues was how to quantify quota. So it came out as a by-product of the discussion and a request from the banks for assistance in terms of how we might be able to value the quota or the licences.

[Raynald Blais, Bloc, Gaspésie—Îles-de-la-Madeleine, QC]

When you study a file, there can be all kinds of people, all kinds of situations. It is practically on a case-by-case basis. Is there an significant difference between the processors and the fishers, or are they all on an equal footing? Are there different ways of treating them? I imagine the answer is yes, because processors have inventory, a particular product, facilities and infrastructure. The fisherman has the boat.

Do you do a different analysis of this or does it simply come back to a normal business relationship?

[Peter Conrod]

I'll speak to that.

We would view the risk associated with each of those two components of the lobster fishery as different. Typically, most of us would view the pounders or the processors as probably representing somewhat higher risk because they have market price risk. They don't know what they'll be able to sell their product for, but they have already purchased it. They know the cost of goods to be sold, but they don't know the revenue, so therefore they don't know their margin.

They are also subject to foreign exchange risk. We've seen very volatile exchange rates over the past six months. They may have purchased it believing they were going to sell it and convert it at a 78¢ dollar. Today we find ourselves with the dollar around 90¢. So that has created more risk for them as an industry. They recognize that. It's not us telling them that they have more risk; they tend to be cautious. Right now they're stocking up on lobster inventory because they feel comfortable with where the market will be during the summer. But not many held on to a lot of inventory following the new year because of those concerns around market price and exchange rates.

[Paul Seipp]

We will see some difference among the different areas of the industry in terms of what their balance sheets look like, where their asset classes are and so forth. So we do treat those a little differently.

The other thing I find is that the bank's requirements for the processors and the harvesters are different. When we talk about the processors, there is often a cash management or a foreign exchange component that gets involved where they need some help. That is an element that typically we don't have to spend as much time or due diligence on with our harvesters.

[Craig Thompson]

I would agree with what has been said. I would point out that the risk assessment will also depend greatly on the species that is being processed. A scallop processing operation these days would be viewed to have certainly less risk than lobster because of the stability of the species and the market demand.

[Raynald Blais, Bloc, Gaspésie—Îles-de-la-Madeleine, QC]

I would like to touch on one final aspect with Mr. Wrobel. One small part of your presentation was of particular interest to me, that is when you spoke about access to credit and the cost of credit. You said that traditionally, the banks represent about half of the business credit market and only about a quarter of the total financing market.

I understand that the others are financing companies, but is this changing? Why do you not traditionally have a greater share than you have, because you are very close to maritime communities, in principle?

[Marion Wrobel]

In fact, Mr. Chairman, the market share of the banks in the last six years or so has actually increased a little bit. We have been growing our business credit faster than others in the marketplace. And those others are credit unions, caisses populaires, life insurance companies, unregulated financial institutions, the capital markets in general--the equity markets and the bond markets. We actually have been increasing our market share, particularly over the last couple of years, when other parts of the market have found it difficult to access financing and then do lending.

So in fact, we have not been pulling back; we have been increasing our lending.

[The Chair, Conservative, Rodney Weston]

Thank you.

Mr. Stoffer.

[Peter Stoffer, NDP, Sackville—Eastern Shore, NS]

Thank you, Mr. Chairman. I apologize for being late this morning.

And thank you very much to our presenters for coming today.

What is the total percentage of your business that deals with the fishing industry--including aquaculture, processors, harvesters, and individuals? How much does the industry play in your business realm?

[Peter Conrod]

I could certainly get you that specific data. My guess would be that somewhere between 5% to 6% of our loan portfolio would be related to the fishery.

[Peter Stoffer, NDP, Sackville—Eastern Shore, NS]

Does that include the west coast, central Canada, the east coast--all across the country?

[Peter Conrod]

No, I'm speaking just on behalf of Atlantic Canada. I don't have those numbers. But I can get them for you, if it's important.

[Peter Stoffer, NDP, Sackville—Eastern Shore, NS]

Second, you're aware of what a trust agreement is?

[Peter Conrod]

Yes.

[Peter Stoffer, NDP, Sackville—Eastern Shore, NS]

You hear this when you're on the dock. If buddy wants to go out and get a loan for a boat and a licence, he can't get it. So he goes to a processor, someone with deep pockets. That person is able to go and get the loan because they have other assets. Does your association look more favourably on someone with a bunch of other assets than someone who doesn't?

I'll use the example of a guy who once told me this down at Yarmouth. He's 25 years old. He wants to buy a boat worth about $50,000, with all the gear and everything. The licence is about $350,000. So you're looking at a $400,000 option. He walked into a bank just basically with the clothes on his back. He tried every institution he could, and he couldn't get a loan. He went to a fellow who had deep pockets and was able to get what he needed.

I'm wondering where this guy would have got the money, the guy he went to, who now holds the trust. Where would he get the money to do that? Obviously he would have to go to a financial institution to borrow those funds. His concern was that it was easier for the other fellow to get the money than it was for him. Is that a fair perception?

[Peter Conrod]

I'll take a stab at that.

I would say that wouldn't be widespread. You reference the fact that he was 25 years old. Typically, we would be looking at his experience as a captain. If he had very limited experience as a captain and was mainly just a boat hand, then obviously that would represent a riskier venture for us. If he had no money to contribute to it, if he was seeking 100% financing, then that would represent a riskier proposition for us.

That being said, if he was 25 years old and did have good experience, I fully expect our bank would be supportive of that under our existing loan policy. We're a large bank. We have lots of business loans outstanding. By virtue of having a big portfolio, you can afford to take on some people you think will be successful in the future, even though the risk may be a little bit higher at the start.

The issue is that if we finance 75%, where does the down payment of 25% come from? Historically, sometimes other industry participants or the vendor of the licence have provided that. My understanding is that under the new trust regulations, that's no longer permitted because it's considered a new trust arrangement. So that may have had some impact.

But I'll open it up to my counterparts here.

[Craig Thompson]

Yes, I would agree with that.

In terms of the scenario of the young person coming in looking for 100% financing and encountering some difficulty, the bank lends using a variety of criteria. As Peter mentioned, experience in the industry, some equity, and some support in terms of perhaps sponsor support from a guarantor would all be factors taken into account. But somebody coming in with no experience and looking for 100% financing would encounter some difficulty in getting financing, whether it was in the lobster industry or anything else.

[Paul Seipp]

I just have one addition to make.

Certainly, in looking at past scenarios of who we've considered for that 100% financing or a new fisher to the market, an option would be off-balance-sheet security, if that's available. In the scenarios that I've seen that look similar to this one, we do put a lot of weight on whether this person can bring to the bank a character reference, someone we would know who will vouch for him, who will indicate that he is capable of doing what he feels he can do with the licence. Then further to that, there may be an option, by way of the buyers or otherwise, to offer some sort of financial support into that transaction. But that's not necessarily a requirement; it's something we look at on a case-by-case basis.

[Peter Stoffer, NDP, Sackville—Eastern Shore, NS]

In the media a while back, Mr. MacDonald of Clearwater indicated, in a reference from a media point, the fact that they deal with the Icelandic banks because they have a much better knowledge of the fishing industry than their own domestic banks. Is that a fair assessment?

[Steve Murphy]

We just recently took a position where the Icelandic bank went into receivership on a well-known publicly traded company in Nova Scotia, to the tune of $40 million, and our due diligence on that I think was very well received. Similarly, we've been looking at other opportunities throughout Atlantic Canada where an opening has been created because of the departure of the Icelandic banks. We have been successful in working either independently or with other banks, BDC, or EDC to put a structure in place that's satisfactory.

[The Chair, Conservative, Rodney Weston]

Thank you very much.

Mr. Calkins.

[Blaine Calkins, Conservative, Wetaskiwin, AB]

Thank you, Mr. Chair.

I want to start off by saying thank you very much to the witnesses for coming here today and thank you for the excellent work you do.

The reality on the ground right now is that we are in a global economic recession. The IMF, the OECD, and other organizations have constantly praised Canada and its lending institutions for the excellent position that our country is in. That's due in large part to the regulations, obviously, but it's also due in large part to the fact that the banking institutions in our country take reasonable and responsible risks, not only in providing credit but also in providing a stable environment for our ability to conduct business in Canada.

I just wanted to let you know that we're not here on a witch hunt. We're not here to try to scapegoat anybody. From our perspective—at least from my perspective—we simply want to know. When we hear about incidents or anecdotal stories on the ground, it leads to some larger questions. I'll start off with that.

You say the lending policy has not changed, that it's 75%-25%, with 25% down and 75% lending. But I would expect--and I think it's a reasonable expectation for most Canadians--that while the 25% down payment might one of the qualifications, during a time when there is an economic downturn and so on the other bars may have crept up a little insofar as making a determination as to who is risk-worthy and who is not risk-worthy. Would that be a fair comment?

[Peter Conrod]

I'd like to comment.

Some of my clients are certainly more challenged today than they were before. Our risk rating for the industry remains unchanged, but certainly some of our clients are more challenged, so we're working more closely with them than we would have in the past.